The Other Stress Test (For Bankers)

There is nothing you can teach Wall Street titans regarding the timing of news flow. Stephen Friedman, the former head of Goldman Sachs, resigned last night as chair of the New York Fed’s board, after committing essentially a rookie error. In December/January, he traded the stock of a company (Goldman) overseen by the NY Fed, while helping to pick a new head of the Fed (formerly from Goldman), and presumably being aware of other potentially nonpublic information regarding bank rescues (benefiting Goldman both directly and indirectly). The real error, given the Federal Reserve System’s incredibly lax rules on potential conflicts of interest at this level, was failing to disclose this information to the NY Fed – they learned it from WSJ reporters and that cannot have been a good moment.
If you have to resign, pick your time of day carefully, and Friedman is obviously advised by the best people in the business. I’m looking at the hard copies of four newspapers. The news of his departure does not make the front page of the NYT (not even the small stuff at the bottom) or the front page of their Business Day section. There is nothing on the front page of the FT or Washington Post. Even the WSJ only manages three paragraphs on the front page, before sending you to look for p.A10. (It was on cnn.com from 5:55pm last night, together with his resignation letter.)
I haven’t checked who first broke the news, but Friedman’s resignation was of course the major development of yesterday. The bank stress test results were hard-baked a long time ago, and almost all the icing on that cake had already been leaked. But the stress test for bankers is still underway.
The idea of a stress test, of course, is to see what goes wrong under pressure. We do this for banks with hypothetical scenarios, but when you go to see the cardiologist you need to step on a treadmill and actually get your heart rate up. The stress test for bankers is very relevant for thinking about our future financial system in three ways:

We are now seeing how they behaved during a boom, both in terms of compensation system and insider-type transactions.

We can see what happened during a crash and attempted recovery; part of which is about massive taxpayer provided subsidies (do the bankers even have the manners to say thank you?) and much of which is about tilting the playing field towards pre-provision earnings (for which Jan Hatzius of Goldman has the most eloquent exposition).

Most interesting, of course, is how bankers think. They regard themselves as entitled to outsized compensation that encourages excessive risk taking. They think that insider trading rules apply to other people. And they are convinced that only they – and their friends – are capable of running government in boom or bust (or in ways that boom leads to bust, at which time you buy low and then recover through large implicit support from the government.)

Really what we have seen over the past two years (a great Freudian slip from the Comptroller of the Currency on NPR last night) is a stress test of our bankers. If you think they basically did fine, then we can go about our business with essentially the same financial system that has developed in the last couple of decades.
If you have concerns about how they behaved and the potential consequences of such behavior down the road, then we need to talk further. The banks passed their stress tests, in part because these were designed by bankers and people friendly to bankers (we could also think about how our regulators have done over the past two years). But are the bankers passing their stress tests?By Simon Johnson

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Although he was back in the saddle in a few hours, Housing.com chief executive Rahul Yadav's scornful resignation letter in which he stated that investors were not "intellectually capable enough to have any sensible discussion anymore" won't be forgotten in a hurry. Just as some quirky exits from the past are still remembered with a smirk: Greg Smith (Resigned in March 2012) Salesman, Goldman Sachs This was one of most public exits in Wall Street history. Smith announced his resignation in an oped article in the New York Times titled "Why I Am Leaving Goldman Sachs".

For the first time since the financial crisis in 2008-2009, the Federal Reserve has cleared all the banks that took part in the stress test. On Thursday, the Fed announced the results of its yearly stress test that was conducted on 31 banks. The banks tested include: Bank of America, Citigroup, Wells Fargo & Co. (NYSE:WFC) and Deutsche Bank AG. All the banks cleared the first stage of the test, proving that they have enough capital in place to secure them through tight economic conditions.

Citigroup (C) is the only megabank headquartered in the U.S. to fail the Fed’s new round of stress tests. In its just released ‘Comprehensive Capital Analysis and Review‘, an annual stress test of major banks operating in the U.S., the Fed says that Citi’s capital plan was among five that failed Federal Reserve stress tests, […]View the full post at: Citigroup (C) Shares Dropping Fast as Bank Fails Fed’s Stress Test

For the first time since the financial crisis, the Fed isn’t handing out any Fs.
On Thursday, the Federal Reserve released the results of its annual bank stress tests. Of the 31 banks the Fed tested—which included the largest U.S. banks, like Bank of America, Citi, and Wells Fargo—as well as some sizable regional banks and the U.S. divisions of large international banks, all were deemed strong enough to weather a severe economic meltdown without any help from the government.

For the first time since the financial crisis, the Fed isn’t handing out any Fs.
On Thursday, the Federal Reserve released the results of its annual bank stress tests. Of the 31 banks the Fed tested—which included the largest U.S. banks, like Bank of America, Citi, and Wells Fargo—as well as some sizable regional banks and the U.S. divisions of large international banks, all were deemed strong enough to weather a severe economic meltdown without any help from the government.

Just when you thought the humor out of the central bank that just released a stress test whose adverse scenario did not even assume the most likely Eurozone outcome, i.e., deflation, couldn't get any better, moments ago we learned that the test, which was supposed to restore confidence in Europe's banking system and in the oversight and regulatory abilities of Europe's central bank, had "errors and inconsistencies" which forced the

As was leaked on Friday, when the market surged on news that some 25 banks would fail the ECB's third stress test (because in the New Normal more bank failures means more bailouts, means the richer get richest, means more wealth inequality), so moments ago the ECB reported that, indeed, some 25 banks failed the European Central Bank's third attempt at collective confidence building and redrawing of a reality in which there is about €1 trillion in Eur

A day after a Reuters headline blast proclaimed that, in a stunning turn of events, the ECB which has barely started buying covered bond (of countries like Germany today for example, because the record low yielding Bunds clearly need help from the ECB) will also buy corporate bonds, sending the stock market soaring the most in 2014, it has now backtracked for the second time, and following a report from the FT yesterday which denied the report, the second denial came straight from Reuters itself which hours ago

DALLAS — Jurors said Wednesday that billionaire Mark Cuban did not commit insider-trading when he sold his shares in an Internet company in 2004 after learning of a development that would dilute the value of his investment.
The jury in federal district court in Dallas found that the Securities and Exchange Commission failed to prove several key elements of its case, including that Cuban traded on nonpublic information.
The nine-member jury deliberated for about four hours. The trial spanned three weeks.

Reuters has an interesting Interactive Eurozone Bank Stress Test
Adjust the Tier 1 Capital Ratio and Sliders for Haircuts and out pops an answer. This is what I came up with. It is hard to get the sliders to stop exactly on the spot you want.